Non-Compete Agreements

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A common provision in employment contracts is the covenant not to compete.  These clauses will also be present when someone is selling their business.  The law upholds these provisions not to prevent competition but to help companies protect trade secrets, customer lists, and confidential information.  This is especially true in service industries where customers are more attached to their salesman than the company itself.

Each state may vary on how they enforce non-competition clauses.  For a non-compete agreement to be enforceable in New Jersey, courts require that the non-compete agreement protects the legitimate interests of the employer but also does not impose an undue hardship on the employee and is not injurious to the public.  Legitimate employer interests include items such as customer lists and trade secrets.  Courts will find non-compete clauses to create an undue hardship if an employee will be unable to find work.  In order to pass judicial scrutiny, covenants not to compete should be restricted to a reasonable geographical area and duration.  These clauses should also be limited to the relevant field of employment.  To determine if a contract is injurious to the public, a court will look into whether the terms of the contract hampers the availability of goods or services in the relevant industry or curtail long-term research and development.

Other factors can affect the enforceability of a covenant not to compete as well.  If an employee quits instead of getting fired, a court will generally be less likely to find undue hardship.  If the court is analyzing a contract for the sale of a business, they will also be more lenient when evaluating the contract language.  Courts are interested in protected the good will of the purchased company so preventing directly competition from old employees makes sense.

On April 4th, 2013, three state assemblymen introduced bill A3970 to the New Jersey assembly.  As of the time of this writing, the bill is still in committee review by the Assembly Labor Committee.  This bill would prevent the future enforcement of covenants not to compete on any individual eligible to receive unemployment benefits.  The bill would not apply to any contracts currently in effect before, or upon, the bill’s passage.  If it does pass, non-compete clauses would only be enforceable against employees who immediately switch jobs or are otherwise ineligible for unemployment benefits.  This is certainly a development for employers and employees to keep an eye on.

If you are subject to, or need some to craft, a covenant not to compete, you can contact Stone Law at 732-444-6303 or leave us a message on our website.